By Carissa Abazia
Consolidating your debt can help increase your credit score.
Here’s what you need to know.
Increase Your Credit Score
A new study from TransUnion explored how debt consolidation loans impact consumer credit performance, overall debt load and credit health. TransUnion says that consolidating credit card debt with a personal loan can help increase your credit score by more than 20 points.
The study found that:
- On average, consumers who consolidate credit card debt pay off more than 58% of their credit card debt with a new personal loan.
- Personal loans help consumers reduce average credit card balances from $14,015 to $5,855.
- Over 60% of consumers who consolidated their credit card debt saw their balances decline by 60% or more from pre-consolidation levels.
- As consumers pay down credit card debt, they lower their credit utilization, how much credit you have used as a percentage of your credit limit. A lower credit utilization shows lenders you are a lower risk borrower, which can increase your credit score.
- Following credit card consolidation, 68% of consumers had their credit scores improve by more than 20 points.
Credit score improvements were not only for borrowers with high credit scores. The 20+ point credit score increase was consistent across the credit spectrum.
What is a personal loan?
You can consolidate credit card debt with a personal loan, which is also known as a credit card consolidation loan. With a personal loan, you can consolidate your existing credit card debt into an unsecured personal loan that is typically repayable in 2 to 7 years. Personal loans range from $1,000-$100,000 depending on the lender.
A cash-out refinance is another financially savvy way to consolidate and reduce debt.
What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash and you can spend it on home improvements, debt consolidation or other financial needs. You must have equity built up in your house to use a cash-out refinance.
I have several clients who pull money out of the equity of their home to:
- Pay taxes
- Pay-off credit card debt
Pros of a cash-out refinance
Lower interest rates: A mortgage refinance typically offers a lower interest rate than a home equity line of credit, or HELOC, or a home equity loan.
A cash-out refinance might give you a lower interest rate if you originally bought your home when mortgage rates ere much higher. For example, if you bought in 2000, the average mortgage rate was about 9%. Today, it’s considerably lower. But if you only want to lock in a lower interest rate on your mortgage and don’t need the cash, regular refinancing makes more sense.
Debt consolidation: Using the money from a cash-out refinance to pay off high-interest credit cards could save you thousands of dollars in interest.
Higher credit score: Paying off your credit cards in full with a cash-out refinance can build your credit score by reducing your credit utilization ratio, the amount of available credit you’re using.
Why consolidate credit card debt?
There are several reasons to consolidate credit card debt:
- Cut your interest rate
- Predictable monthly payment
- Easy application process
Cut your interest rate
Some credit cards have APRs as high as 10-25%. That means you could be paying a higher interest rate than your student loans, auto loans and mortgage combined. In some cases, high interest charges can make it very difficult to pay off credit card debt. Personal loan rates start as low as 5.99%, which are significantly below credit card interest rates. Cash-out refinance rates are at a historical low so if you have a lot of debt, it is time to call your local and trusted lender.
Predictable monthly payment
Credit card debt has a variable interest rate, which means that the interest rate may change over the course of your credit card debt repayment. In contrast, personal loans and mortgages have a fixed interest rate. That means you pay the same, fixed amount each month regardless of changes in interest rates, which is more predictable.
Easy application process
You can apply online for a personal loan, and can start by comparing lenders and interest rates. If you have more than $100,000 in credit card or tax debt, you can apply for a cash-out refinance here. Lenders will evaluate your financial and credit profile, including your credit score and income, to determine your interest rate. If you receive an interest lower than the interest rate on your credit card debt, it may be financially advantageous for you to consolidate your credit card debt.
Let me know how I can help you get out of debt.
Thanks for reading!